Video Games: Serious Business for America's Economy

Entertainment Software Association Report, 2006

48 Pages Posted: 12 Mar 2007

See all articles by Robert W. Crandall

Robert W. Crandall

Brookings Institution; AEI-Brookings Joint Center for Regulatory Studies

J. Gregory Sidak

Criterion Economics, L.L.C.

Abstract

This paper analyzes the contribution of the computer and video gaming industry (“entertainment software”) to the U.S. economy. In 2005, revenues for entertainment software products and directly related accessories were $10.5 billion. By definition, every dollar spent on entertainment software in the United States contributes directly to the gross domestic product (GDP). In 2004, U.S. sales of entertainment software reached $8.2 billion; total world sales reached $25.4 billion. The cumulative average rate of entertainment software sales in the United States is expected to remain at 15 percent per year through 2010. GDP also increases with exports of U.S. video games to foreign countries. According to the annual reports of some U.S.-based video game software firms, these exports totaled $2.1 billion in 2004. Hence, the direct, immediately identifiable contribution of entertainment software to the nation's output exceeded $10.3 billion in 2004 and growing quickly. We analyze these contributions of the entertainment software industry in a section entitled “The Market for Entertainment Software as a Good.”

The direct contribution to the nation's output does not reflect the total contribution of the entertainment software industry. The purchase of video game triggers the purchase of a host of complementary products, and thus the sale of software contributes indirectly to the nation's output. We analyze these specific contributions of the entertainment software industry in a section entitled “The Stimulative Effect of Entertainment Software on Technological Innovation and Consumer Demand in Complementary Markets.” These complementary products can be placed in four categories: processors, content, devices, and broadband Internet access. By tracing the sales of these complementary products, we estimate that the direct sales of entertainment software stimulate additional purchases of roughly $6.1 billion each year in the United States. Some complementary sales, such as those of specialized gaming personal computers, can be claimed in their entirety. A portion of other sales, such as the sale of high definition televisions and broadband Internet access service, should also be allocated to the entertainment software industry. Not only does entertainment software trigger complementary sales, it triggers those complementary sales faster than they would otherwise occur. For example, but for the demand for video games, computer processing would not have developed as quickly. When one accounts for these complementary sales, the direct and indirect contribution of entertainment software to the nation's output exceeded $16.4 billion in 2004.

As impressive as this $16.4 billion is, the simple calculation of the direct contribution to GDP still understates the total economic contribution of the entertainment software industry because it does not consider two other important sources of economic value. First, the entertainment software industry invests significantly in specialized human capital and other specialized inputs, such as hardware and software, used to make a video game. The industry invests a large percentage of its sales into research and development (R&D) in an effort to generate even more innovative games for the next generation of players. Those investments in human capital and R&D create external benefits that are enjoyed by other sectors of the economy. We analyze these particular contributions of the entertainment software industry in a section entitled “The Demand for Inputs Used in the Production of Entertainment Software.” Second, video games find other applications, sometimes intentionally and other times by accident, in other industries throughout the economy. Although these “technological spillovers” are not captured in the GDP numbers, they represent a significant contribution to the overall economy because increases in productivity caused by advances in entertainment software translate into a higher standard of living in the future. We analyze these particular contributions of the entertainment software industry in a section entitled “Technological Transfers from the Entertainment Software Industry.”

Keywords: Video Games, software

Suggested Citation

Crandall, Robert and Sidak, J. Gregory, Video Games: Serious Business for America's Economy. Entertainment Software Association Report, 2006. Available at SSRN: https://ssrn.com/abstract=969728

Robert Crandall

Brookings Institution ( email )

1775 Massachusetts Ave. NW
Washington, DC 20036-2188
United States
202-797-6291 (Phone)
202-797-6181 (Fax)

AEI-Brookings Joint Center for Regulatory Studies

1150 17th Street, N.W.
Washington, DC 20036
United States

J. Gregory Sidak (Contact Author)

Criterion Economics, L.L.C. ( email )

1717 K Street, N.W.
Washington, DC 20006
United States
(202) 518-5121 (Phone)

HOME PAGE: http://www.criterioneconomics.com

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